New Criteria for Debt Relief

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The Obama administration is proposing new standards for when the federal government will forgive the student loans of borrowers who say they were victimized by their college or university.

U.S. Department of Education officials this week circulated a first draft of the administration’s proposal to members of a rule-making panel that is in the process of negotiating changes to regulations governing debt relief for federal student loans.

One key provision would require borrowers to prove that their college made “substantial misrepresentations” that duped them into attending that institution, according to a copy of the plan obtained by Inside Higher Ed.

In some cases, under the administration’s proposal, a borrower would face off against his or her college in an Education Department proceeding run by a “hearing official,” who would make the final decision on the debt relief claim. The college, which is held liable for any debt forgiven by the department, would be allowed to fight the borrower’s debt relief claim.

The education secretary would have the power to appoint a department official to argue on behalf of the borrower as well as the power to consolidate similar cases, though neither would be a requirement.

The 14 pages of draft rules, which will be debated this week by the rule-making panel, outline both a new process for how borrowers may apply for loan forgiveness as well as the criteria that the department will use to resolve claims for debt relief.

The plan describes three scenarios in which borrowers would be entitled to loan forgiveness: when the borrower succeeds in a legal case against the college (including as part of a class-action lawsuit), when the college fails to meet its obligations under a contract it had with the borrower and when the college makes a “substantial misrepresentation” to its students.

The administration is proposing to get rid of the current standard for debt relief, which Education Department lawyers have struggled to interpret. The current rules -- which were written by the Clinton administration and rarely tested until the collapse of the for-profit chain Corinthian Colleges -- say borrowers can have their loans forgiven whenever their college does something that would be illegal under a state law.

The department has said that it has been a challenge to deal with varying laws across the 50 states. It has hired a “special master” and a staff of lawyers to advise the department on resolving the existing claims. And administration officials have also said they worry about the possible inequity that would arise for borrowers if the same college’s conduct was legal in one state but illegal in another.

Still, state consumer protection laws typically govern issues that go beyond misleading statements, so in some ways the new federal standard may have the effect of limiting the scope of circumstances that lead to debt relief.

Under the department’s proposal, officials would continue to use the existing standard for loans disbursed until July 2017.

The draft plan also clarifies, for the first time, that a college’s violation of federal rules would not, in itself, be enough for borrowers to receive debt relief. That’s an important distinction, because it would potentially constrict the type of misconduct that would qualify students for loan forgiveness.

For instance, after the Education and Justice Departments struck a settlement with the Education Management Corporation to resolve charges that the company illegally recruited students to its campuses, then Education Secretary Arne Duncan said that settlement would not entitle students to debt relief because the alleged misconduct involved lying to the government, not lying to students. (EDMC did not admit any guilt as part of the settlement.)

The Education Department’s proposal would also impose a statute of limitation on debt relief claims that are based either on a college’s breach of contract or its “substantial misrepresentation.” The department has said that currently there is no time restriction on debt relief claims.

The negotiations over new debt relief standards come as the U.S. Department of Education continues to process thousands of debt relief claims -- totaling hundreds of millions of dollars -- from borrowers who attended the now-defunct Corinthian Colleges, as well as other for-profit colleges.

Some of the student debt activists who have been pressuring the department to provide broad, class-based relief to former Corinthian students said Tuesday that they were not pleased with the department’s first attempt to come up with new debt relief rules.

“Our goal is to advance the ball for defrauded student borrowers, and this proposal needs a lot of work before we could say that we’ve delivered something useful for defrauded borrowers,” said Chris Lindstrom, higher education director of U.S. PIRG and an alternate negotiator on the department’s rule-making panel.

Lindstrom said she was also disappointed that the draft language did not include more robust mechanisms for the Education Department to grant debt relief to groups of students who attended the same college. Consumer advocates and student activists have repeatedly said they believe it would be unfair for each individual loan borrower to have to individually prove his or her claim.

Negotiations over the debt relief rules will continue for the rest of this week and reconvene again in March.